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This Is the Real Reason Sbarro Is in Bankruptcy

By Neil Irwin March 13, 2014 7:00 amMarch 13, 2014 7:00 am

Photo

A Sbarro restaurant in San Jose, Calif.Credit Paul Sakuma/Associated Press

Let’s get this out of the way first: The food at Sbarro, the pizza-and-pasta chain, isn’t very good. The pizza crust manages to be both thick and limp, the tomato sauce bland, the cheese the victim of sitting for too long under heat lamps.

Plenty of fast-food places serve food that isn’t very good. But Taco Bell, Arby’s and Long John Silver, to cite three examples, have not found themselves at the doors of a bankruptcy court twice in the last three years, an honor Sbarro managed this week with a Chapter 11 filing.

The reason Sbarro is having a rougher time than other, more solvent purveyors of not-good food goes to the root of its business: You eat Sbarro not because you want Sbarro, but because it is the food that is available at the moment you want some food. The last time I ate at one of its 800 locations was in an airport where the next best alternative was a turkey wrap that looked as if it had been in the chiller even longer than the Sbarro pizza had been under the heat lamp.

The company is in financial trouble because one of its big bets on real estate — that Americans will keep going to mall food courts en masse — has turned out to be wrong. ShopperTrak, a company that measures foot traffic at retailers, reported a 14.6 percent decline in the 2013 holiday season compared with 2012, continuing a pattern of double-digit declines.

The story is told in Sbarro’s filing for bankruptcy protection early this week. Six of the seven biggest creditors listed are entities to which the company owes lease payments. It owes more to several individual landlords than it does to the supplier who provides the soda to enable Sbarro’s customers to wash back their greasy pizza.

The company’s challenge highlights the underlying problem with a strategy built around selling mediocre pizza at the right place and right time. It means that owners of the real estate in question can extract much of the value of the crowds they attract, not the restaurant chain.

Other fast-food chains may offer mediocre food, but their real estate strategies are less exposed to the epic decline in foot traffic in the nation’s malls. As people do more shopping online, fewer are visiting the mall — and more seem to be putting a bit more thought into their food.

Tyler Cowen, a George Mason University economist and prolific writer on food, argued in his book “An Economist Gets Lunch” that the best way to get delicious food at a good price is to seek out low-rent districts. There, restaurateurs can afford to experiment and take risks. In effect, the harder a restaurant is to find, the lower the rent is likely to be, and the more the restaurant will be seeking to attract customers with the quality and value of its food rather than mere convenience.

So the good news buried in Sbarro’s decline is that if consumers’ inclination to shop at malls keeps declining, and landlords must slash rent charges to keep them full, rents could fall low enough to invert the entire food-court business model. With low enough rents, the food court could become the new hotbed of innovation, the place where entrepreneurs find the space to try a new concept, with a bit more upfront expense than a food truck but less than a standalone restaurant.

This article is a preview of The Upshot, a New York Times site dedicated to demystifying politics, economics and other subjects. It will debut on nytimes.com this spring. To learn more, follow David Leonhardt on Facebook and Twitter. You can also follow Neil Irwin, a reporter for The Upshot, on Twitter.

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Economics doesn't have to be complicated. It is the study of our lives — our jobs, our homes, our families and the little decisions we face every day. Here at Economix, journalists and economists analyze the news and use economics as a framework for thinking about the world. We welcome feedback, at economix@nytimes.com.